3.

PLANNING AND PROGRAMMING OF MATERIALS

The starting point for the planning of materials procurement is the production schedules. Based on the annual sales of forecasts the production schedules are made. Working backwards on the schedules the dates on which the different materials must be in plant are calculated. Normally a factor of 1.2. or any other appropriate factor of safety should be used in working out the latest dates of arrival. The quantities are also computed with the help of bill of materials. This statement of annual requirements helps the purchasing department in formation policies for different materials as (1) Contract buying, (2) Blanket contracts, (3) One time buying (for seasonal materials) and so on. It also gives the purchasing sufficient lead time for items that need substantial procurement periods. The items for which the markets are more or less steady and the purchases are comparatively easier are not tackled at this point. Any changes in the lead time for procurement are fed back to the inventory control section. Subsequently as and when the periodical production schedules are made, Production Control sends the bill of materials for each product planned to be produced during the next period and the quantities of each product to the inventory control; who enter the stocks on hand and forward it to purchasing for procurement. The initiation for purchase of other items, which dont directly go into the product is done by inventory control based on their records of stocks and ordering points. These have to be approved by the planning, since there is always the chance that inventory control may keep on ordering items that are intended to be discontinued. The above practice is followed successfully by a number of Manufacturers of Automobile and Aircraft parts, electrical components, pharmaceuticals, confectionery and machinery manufacturers. Whatever the method of initiating the purchasing orders, it is important that the information regarding anticipated requirements be given to the purchasing department at the earliest possible stage. The bill of materials method has the advantage of getting this information the sooner the production schedule is tentatively set.

A bill of materials form is given below: Bill of Materials Product Specifications Order Nos. Material Unit Code or Description Qty. Nos. per Qty. Unit Schedule Date: Reqd. on Stock on Order date hand Date unalloted

Signature of P.P.C.

Stores

Purchase

A lot of work in requisitioning routine items, by stores can be saved if an additional card in Kardex for each item is introduced. This card has the description of the item and specifications and 30 lines for order requisitioning. Each time the order point is reached the card is filled in for quantity or replenishment required and sent to purchasing when the card is not found in Kardex the record keepers immediately know that an order has already been placed for replenishments. Its always convenient to purchase commodities in groups, so that even though individual quantities are small the aggregate order becomes substantial, affording advantages of discounts. There are also savings affected in transport and the ordering work of purchasing department is reduced. Colour tags can be attached to the cards mentioned above to indicate its group and all cards in one group can be reviewed at one time. Here it is necessary to note that the order point of all commodities in one group is not likely to occur at one time, but at least the commodities for which the difference is not excessive can be ordered at one time. Moreover with practice its possible to intelligently adjust so that for more of the items in group the order points lie somewhere together. The above methods apart from reducing considerably the clerical work afford more economies and convenience in procurement and reduce the changes of stock outs.

BUDGETING AND PLANNING OF MATERIALS Materials budget is a part of the total company budget and is a device of estimating and planning the expenses of materials well in advance and ensuring the availability of funds at the required time. It is also a tool for pinpoints any variations from the planned expenditures so that, such variations can be further investigated for corrective action. The budgeting committee normally consists of companys major department heads and budgets most frequently are annual. The starting point for the budget is the sales forecasts for next year annual plan. Many companies prefer to take next 3 to 5 years of sales forecasts into consideration as these help suggest in advance of any plant expansions or curtailments necessary in future. In Indian conditions where sales forecast is not an easy matter the orders outstanding (which can in many casts book 12 to 14 months of plant capacity) can be used for making budgets. Based on the sales forecasts for New Year production schedules are prepared. From the bill of materials for each product, the quantities of different materials are consolidated. Working on the production schedules backwards the latest dates when the materials must arrive in the plant are calculated. Till now all the materials are expressed in terms of units and till now we have collected the total annual requirements and the dates of latest arrivals at factory. Quality discounts can also be utilized more effectively. Inventory investments and its associated risks, can likewise be reduced by advance planning of requirements. Materials budgets provide a maximum of purchase lead time. This benefit permits the careful selection of qualified suppliers, negotiations without pressure of deadlines and a better change of obtaining maximum value for every Re. Spent. Savings can also be effected through use of routine transport rather than premium transportations. The work and cost of expediting get reduced. Purchasing requirements can be meshed with the production schedules of vendors. In using budgeting for controlling purchasing performance certain limitations exist. One is the budget can be only as accurate as the sales forecasts. If the forecasts are not reliable the budget too will be as unreliable and cannot be used for effective controlling. Secondly, some amount of experience has been gathered to make the budgets realistic and useful for planning initially they tend to be far from it and this is the time people tend to under rate its importance or think of it as nothing more than as routine exercise.

4. INVENTORY ANALYSIS AND SELECTIVE CONTROLS 1. 1.1 Introduction: A typical industrial inventory comprises of four components, viz.,
i.

Production inventories: Raw materials, parts and components bought out which go into the manufacturing process of the company products. MRO inventories: Maintenance, repair and operating supplies which are consumed in the production process but which do not from a part of the product (often known as consumables). In-process inventories: Semi finished products at various stages in the production operation. Finished goods inventories: Completed products ready for shipment.

ii.

iii.

iv.

2. 2.1

Inventory Analysis: Altogether the company deals with stock of thousands of items raising a serious problem of how one can keep control of track of all these items also, where is it necessary to have the same extent of control on each and every item. Different types of analysis each having its own specific advantages and purpose, help in bringing a practical solution to the control of inventory. The most important of all such analysis is the ABC analysis. The other are VED analysis SDE analysis RML analysis FSN analysis And many others, described here.

3. 3.1

Selective Control: The common purpose of analyzing the inventory is to formulate selective controls. The extent of attention paid, cost incurred and controls installed

should have definite relationship with the results and achievements obtained by such measures. 4. 4.1 ABC analysis: ABC is said to connote Always Better Control. The basis of analyzing the Annual Consumption Cost (or usage cost) goes after the principle VITAL FEW TRIZIAL MANY, and the criterion used here is the money spend and not the quantity consumed. The figure given below brings out clearly the concept of ABC analysis. 100

1. of Comulative Consumption

90

70

0 10 30 % of Items The general picture of ABC analysis will show the following pattern: Item % A items B items C items 10 20 70 % of the Annual Consumption Cost 70 20 10 100

In many cases, the figures bring out that the A items are still fewer in number representing the bulk of the money. To cite an example Class of Items A B C Item % 8 25 67 % of the Annual Usage Cost 75 20 5

It may be of interest to note that this ABC analysis i.e. the vital few; trivial many, principle is observed in most of the business problems such as number of dealers and volume of business; different items of expenditure of revenue and the amount concerned nature of customer complaints and number of complaints, etc. etc. The controls necessary on A, B & C items are obvious Thick on the best, thin on the rest. One of the Departmental Stores modified this to state, Thick on the best of hell with the rest. 5. 5.1 VED analysis: This analysis specially pertains to the classification of maintenance spares denoting the essentiality of stocking spares. VED6. 6.1 stands for Vital items when go out of stock or when not readily available, completely bring the production to a half. is for Essential items without which temporary losses of production or dislocation of production work occurs. denotes Desirable items all other items which are necessary but do not cause any immediate effect on production.

SDE analysis: For developing countries and especially where certain items are in scarce supply, this analysis is very useful. Srefers to Scarce items, especially imported items and those which are very much in short supply.

D-

are Difficult items which are available in market but not easily available. For example items which have to come from far off cities or where there is not much of competition in market or where good quality supplies are difficult to get. items are those which are easily available; mostly local items.

E7. 8. 8.1

It is normally advantageous to continue A, V & S items for selective controls. HML analysis: The cost per item (per piece) is considered for this analysis. High cost items (H), Medium cost items (M) and Low cost items (L) help in bringing controls over consumption at the departmental level. FSN analysis: Here the quantity and rate of consumption is analysed to be classified as Fast moving (F), Slow moving (S) and Non moving (N) items. The Non moving items (usually, not consumed over a period of two years) are of great importance. It is found that many companies maintain huge stocks of Non moving items and the number of such items running to thousands. Scrutiny of non moving items is to be made to determine whether they could be used or to be disposed off. The Fast & Slow moving classification help in arrangement of stocks in stores and their distribution and handling methods. Other type of analysis:

9. 9.1

10.

10.1 Items held in stock could be analysed category wise, product or project wise. The turnover ratio of holding of stocks after such analysis are found very useful in certain cases. 11. It is important to note that the different types of analysis described here are meant to be used only when and where found necessary and useful; otherwise, they may turn out to be of academic interest.

12.

Control of A items:

12.1 The annual consumption cost being very high for these few items, any small percentage savings brings out large benefits such as reduction in expenditure, release of locked-up capital, etc. Normally, these items are to be under the direct control of the purchasing manager himself. All endeavors should be to reduce the safety stocks, low cost of purchasing, control on consumption and waste. The measures to be taken on A items can be briefly put down as follows: i. ii. Annual contract for supplies with as frequent staggered deliveries as is economical. Minimum safety stock or even fluctuating safety stocks by maintaining better vendor/vendee relationships speculation of market conditions, supply conditions, etc. More frequent review of stock position and consumption patterns. Precise quality specifications or materials standards evolved. Value analysis to find cheaper substitutes, better sources of supply and to reduce the overall costs. Waste control measures to reduce the scrap, rejection, rework and sub standards. Continuous developmental work or research carried out wherever possible.

iii. iv. v. vi. vii.

viii. Possibility of adopting cock-system when the materials are stored and supplied at the factory site by the supplier at his own cost. 13. Control on C items:

13.1 The other extreme where a large number of items constituting a small percentage of costs, needs very simplified procedures and objective being to reduce the purchase costs as well as handling and distribution costs. The following measures are suggested:

i. ii.

Maintain sumptuous stocks (avoid the proverb, For the sake of horse shoe nail, the battle was lost). Purchasing costs minimized through single tender system, blanket contract, travel orders, clubbing of similar items into one purchase order, purchasing annual requirements, blank cheque ordering procedure, etc. Inventory carrying costs and paper work reduced by bulk issues, writing off the values (control through perpetual inventory) of stocks, variety reduction and standardization, pool system, etc.

iii.

14.

Control of B Items:

14.1 On these items, the controls are via-media of A & C. Usually, the safety stocks are decided on a policy basis.

5. REPLENISHING SYSTEMS 1. 1.1 Introduction: Replenishing system for stock control involve two main controls on (i) the ordering system and (ii) the safety stocks. The analytical approach to these inventory control techniques has the logical starting point in the basic inventory model and economics of managing the inventory. The total annual cost of managing the inventory of an item consists of its two components, which are (i) the ordering cost and (ii) the inventory carrying cost. The total cost of these reaches a minimum point (as shown in the figure) at a value of ordering quantity known as E.O.Q. (Economic Ordering Quantity), which could be mathematically established by simple formula. Total cost

1.2

Cost

Carrying cost

Ordering cost

E.O.Q. Quantity

EOQ =

2 X (Annual Usage in Units) X (Order Cost in Rs./Order -----------------------------------------------------------------------------(Unit cost of matl. In Rs./Unit) X (Carrying cost in % per year expressed in decimals)

1.3

The inventory model which illustrates an ideal movement pattern for a material whose usage is constant is given herebelow: Ordering Qty.

Quantity in Units

Safety stock Time in days 2. 2.1 The Ordering Systems:

Average Inventory

There are two ways to find out when and how much quantity is to be ordered. The first is based on fixing a Re-Ordering point (known as ReOrdering level or R.O.L.) and when the stocks fall below this point an order is placed. The second approach is to place an order at fixed intervals of time.

These two approaches can be termed as: R.O.L. method of ordering. Periodic Ordering Method.
2.2

R.O.L. Method: The R.O.L. is determined by adding the Lead Time requirements to safety stock.

R.O.L. = Safety Stock + Lead Time Requirements. The Ordering Quantity is usually the Economic Ordering Quantity, as shown in the following figure: Reorder Point

Quantity in Units

Average Inventory Reorder Level Order received Lead Time in days Time in days The average stocks maintained will be: Safety stocks + of E.O.Q.

2.3

Periodic Ordering Method: The stocks are received at fixed intervals of time (known as Review period) and orders are placed either for a fixed quantity or a variable quantity. i. When the ordering quantity is fixed (the E.O.Q.) it is checked whether at the periodic reviews the stocks have fallen below a Re-order Limit (R) if the stock is lower than the Re-order Limit, order is placed for E.O.Q.; otherwise if it is above the Re-order point, no action need to be taken till the next review point. The Re-order point, R, is calculated as follows: R = Safety Stock + Rate of Consumption (Lead Time + Review Period) 2

The inventory model is shown in the following figure:

Quantity in Units

Recorder

___ P _________ L

Order received

Time in days R = B = Sd = L = P = Re-order point (in Units) Safety stock (in Units) Average daily sales (Units/day) R = B + Sd (L + P/2) Average lead time (in days) Review time (in days)

The average stock works out to : Safety stock + of E.O.Q. ii. Where there is no fixed ordering quantity, the ordering quantity is determined as the difference between the actual stocks held at the time of periodic review and the Maximum Inventory Level (M) M = Safety Stock + Consumption Rate (Lead Time + Review Period) Depending upon whether the Lead Time is greater or lesser than the Review Period, one of the following two rules is used in fixing the Re-ordering quantity: If Lead Time If Lead Time Review Period, Ordering Quantity = M Actual Stores held at the time of review. Review Period, Ordering Quantity = M (Actual

Stores held at the time of Review + Quantity on Order) The Inventory fluctuation by this system is shown in the following figure: Qty. Ordered Replenishment Level M Quantity ordered

Quantity in Units

-L-

-R-

Time days L = Lead Time (days) R = Review Period (days) The average stocks = Safety Stock + Consumption Rate X Review Period.

in

2.4

Optimum Review Period: The Optimum Review Period could be calculated by using the following formula. Optimum Review Period (in months) = 288 X Cost per order in Rs. Annual Usage X Unit Cost X Annual Inv. Carrying Cost (in units) (in Rs.) (as a decimal)

3. 3.1

Safety Stocks: The Safety Stocks become necessary in order to avoid Stock Outs if the rate of consumption increased and/or the lead time gets extended from the values considered for the replenishing systems. Thus, a simple way of establishing the safety stock would be to find out the above two variations that could normally occur over a period of time in terms of additional quantity of stock to be maintained. Applying the Probability Theory, safety stock could be determined as follows: i. When R.O.L. System is used: Safety Stock = K Average consumption during lead time ii. When Periodic Review System is used: Safety Stock = K Average consumption (lead time + review period)

3.2

3.3

3.4

The factor, K, is taken out from the table given in the next page.

Acceptable Average No. of Years between stock outs. 20 15 12 10 9 8 7 6 5 4 3 2 1

ORDER QUANTITY IN MONTHS SUPPLY 12 2.64 2.54 2.48 2.39 2.36 2.31 2.26 2.20 2.13 2.04 1.92 1.73 1.38 11 2.39 2.29 2.20 2.13 2.09 2.04 1.98 1.92 1.83 1.73 1.59 1.38 0.97 10 2.24 2.13 2.04 1.96 1.92 1.86 1.80 1.73 1.64 1.53 1.38 1.15 0.67 9 2.13 2.01 1.92 1.83 1.79 1.73 1.67 1.59 1.50 1.38 1.22 0.97 0.43 8 2.04 1.92 1.82 1.73 1.68 1.63 1.56 1.48 1.38 1.26 1.09 0.81 0.21 7 1.96 1.83 1.73 1.64 1.59 1.53 1.47 1.38 1.28 1.15 0.97 0.67 0 6 1.89 1.76 1.66 1.57 1.52 1.45 1.38 1.30 1.19 1.05 0.86 0.55 0 5 1.83 1.70 1.59 1.50 1.45 1.38 1.31 1.22 1.11 0.97 0.76 0.43 0 4 1.78 1.64 1.53 1.44 1.38 1.32 1.24 1.15 1.04 0.89 0.67 0.32 0 3 1.73 1.59 1.48 1.38 1.33 1.26 1.18 1.09 0.97 0.81 0.59 0.21 0 2 1.69 1.55 1.43 1.33 1.27 1.20 1.12 1.02 0.90 0.74 0.51 1.10 0 1 1.64 1.50 1.38 1.28 1.22 1.15 1.07 0.97 0.84 0.67 0.43 0 0

K factor used to calculate the safety stock needed to provide various levels of protection against stock out for items whose usage pattern is similar to a Poisson distribution.

5. 5.1

Ready Reckoners: For the replenishing system (including for Safety Stocks), tables could be prepared which would act as Ready Reckoners to replace the laborious calculations involved. Some examples of such tables are given here below. For examples, if the cost of placing an order is Rs.10 and the inventory carrying cost is 24%, the following tables could be prepared to determine either the E.O.Q. in terms of number of days/weeks/months/years requirements or the member of orders to be placed in a year. Annual Usage Cost No. of in Rs. year Upto 200 201 500 501 1000 1001 2100 2101 6750 6751 27000 27001 120000 120001 & above orders per No. of months requirements per order 1 1 year 2 6 months 3 4 months 4 3 months 6 2 months 12 1 month 24 2 weeks 52 1 week

5.2

5.3

The Review Period depending upon the Annual Usage Cost is given in the following table, where cost of placing an order is Rs.10 and Annual Inventory Carrying Cost is 24%. Annual Usage Cost in Rs. Upto 400 401 600 601 1000 1001 2000 2001 6000 6001 & above Review Period in Months 6 5 4 3 2 1